The West Michigan commercial real estate market has been relatively stagnant during the pandemic-induced shift to remote working, but advisers see some room for optimism ahead of a vaccine rollout and with several recent office deals.
“No matter what industry we’re talking about, I think the driving force is people’s attitude — which used to be fear, but that is no longer the case,” said Chip Bowling, senior adviser and principal at Bradley Co. “People have been pent up and want to get back out to a social environment.”
Amid the lingering uncertainty around the future of office space, Bowling expects many office tenants to make long-term decisions toward the end of the first quarter of 2021.
Global real estate services firm JLL Capital Markets’ office insight report for the fourth quarter of 2020 showed market-wide vacancy rates in Grand Rapids at 10.1 percent, a year-over-year increase of 0.4 percent. Year-end leasing volume plummeted 60.1 percent from 2019. Average direct asking rents slid 1.3 percent.
“There will be an increase in subleased space as some of these office occupiers are reassessing their office footprint and working from home,” said JLL Senior Research Analyst Harrison West. “Some companies will be looking to shed a portion of their office space, leading to an increase in sublease space in Grand Rapids and Detroit. Not at the scale of coastal markets, but we’re starting to see an increase in subleasing.”
Subleased office space comes at a discount, with rates approximately 10-20 percent below market rents, according to a Bradley Co. office market insights report. Sublease deals right now include benefits such as short-term leases, furniture, rent abatements or subsidized tenant improvements.
This rise in subleased space hasn’t had a major effect on landlords so far, as most are receiving the majority of their rental payments, according to the Bradley Co. report. But subleased space will soon put pressure on market rates and could ultimately put pressure on landlords to drop their rates if they want to compete for new tenants in the open market.
Companies that choose to work from a physical office going forward will need amenities that help attract talent, said Jeff Tucker, senior managing director of brokerage and principal at Bradley Co.
“Amenities in an office setting will have to be as good or better than an employee’s house,” Tucker said. “An amenity driven workplace will draw people who prefer to be in-person and engaged as opposed to if you have a suburban office and live in the suburbs, where you will be more likely to work from home.”
Companies driving change
Pharmaceutical manufacturer Perrigo Co. plc’s plan to relocate its North American headquarters to downtown Grand Rapids could cause other similarly big moves by corporations, Bowling said.
Insurance giant Acrisure LLC has also relocated its headquarters to Studio Park in Grand Rapids and is in the process of taking occupancy at the new location.
“It’s our prediction the companies that come downtown will have a competitive advantage to recruit young talent,” Bowling said.
Downtown is still a sought-after location despite businesses shutting down in 2020 under pandemic restrictions — especially as the city pursues activating the riverfront with multiple planned developments, including an amphitheater, Bowling said.
A similar trend could play out in smaller cities like Holland and Muskegon by attracting larger companies to their downtowns for office space, Tucker said.
“These little communities are figuring out they have these amenities and pieces that will make people want to be a part of that company and come to work,” Tucker said.
JLL’s office market report also points to Integro Builders LLC moving its office from Chicago to Grand Junction, just east of South Haven, as an example of a company considering a low-cost office alternative amid the work from home trend.
“We’re also starting to see lowering the density of how many people are working at an office space, and people are being spread out,” said JLL’s Senior Vice President Bob Horn. “We are seeing some footprints stay as they had been, but with fewer people.”
The office trends are hard to predict, but Horn expects the market to be soft for the next 18 months.
“It’s not a (one size fits all) approach,” JLL’s West said. “Some companies realize working remotely is working for them, but others need to be face to face in an office that is collaborative.”